Why do I invest in the stock market?

I like a challenge.  If you speak to my wife, Emma, you’ll also learn I’m quite competitive.  I tend not to act on impulse, and I tend to consider my options before making a decision (it took me three months to decide what TV to buy.  Emma was not happy).  I also invest in the stock market.

You may well be thinking “hey, they sound like good traits for someone who wants to manage their own money”.  I think the thoughts you think are right.  If you can identify with some or all of these traits, managing your own money might just be right for you too.  So keep reading!

Pensions

I saw this weekend that the 88-year old British Home Stores (BHS) closed it’s stores for the final time, ending a legacy of thoroughly British shopping (though I’m fairly certain I’ve not once bought a thing in there).

I’m not all that bothered about the stores closing (aside from holding certain opinions on “Sir” Philip Green which can’t be expressed on a family-friendly website such as this), however what I find upsetting is the pension uncertainty for all of it’s 20,000+ former employees.  At last count, the pension deficit is approximately £571 MILLION pounds.

Now, one saving grace is the Pension Protection Fund, which will guarantee up to 90% of a persons pension pot, up to £33,000 per year.  But ask yourself, how many times over the years have you read about a company going bust and employees, current and former, losing their pensions?

That scares me.

Fortunately for me my pension is with the UK government and theoretically should be safer than a private company pension.  But consider this: in the short few years since I started full-time employment I have seen my pension change from final-salary to career-average.  I have also seen the Global Financial Crisis essentially pass private debt on to the government, leading to massive deficits we are only beginning to feel the true pain of now.   What else will happen in my lifetime?

I think it’s essential that people start to take steps as early in life as possible to save for their futures, like I’m doing.  I also think it’s important for people to have some idea where best to allocate their money.

The Stock Market

So on to the stock market.  If you’ve read my Taking the First Step page you’ll have seen the chart from Barclays showing historic returns of equities (stocks), gilts (government bonds) and cash.  I’ll post it again for your convenience:

Stock Market Historical ReturnsSource: Barclays Equity Gilt Study

Not even close.  Why is this?

One reason is that cash and fixed income (such as gilts & bonds) are eroded by inflation over time.  We currently live in a world of low inflation, which partly explains why people are pouring their money into these (safer) fixed incomes.  But consider this: the ten year yield on gilts is 0.56%.  You’d get a better return investing in a cash ISA!

(By the way, this is also creating MASSIVE problems for the pension industry, who traditionally invest into safe assets such as gilts).

You may be reading this and thinking “but the stock market is riskier”.  You’re right.  It is.  There’s no two ways about it.  But inflation is currently running at 0.5% and the top paying easy-access cash ISA is paying 1.1%.  There goes half your return.  And that’s in a LOW inflationary environment.

I consider that to be more risky.

At the start of this post I said I like a challenge.  My challenge is to find the best place to put my money to build something for the future.  If this sounds appealing to you, I hope I can help get you started.

Until next time.

Chriss

(P.S. Eight years on and our TV is still going strong.  It’s worth doing your research.)

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